SEBI's PUSTA Regulations: Overview, Concerns, and Future Implications

SEBI Shelves PUSTA: Why a Bold Anti-Fraud Proposal Was Put on Hold

In May 2023, the Securities and Exchange Board of India (SEBI) floated a bold new proposal: a regulatory framework that would give the watchdog stronger tools to tackle opaque, algorithm-driven misconduct in the securities market. Dubbed the PUSTA Regulations—short for Prohibition of Unexplained Suspicious Trading Activities—the draft framework represented a serious attempt to modernise enforcement in an era of vanishing digital footprints and increasingly sophisticated market manipulation.

A Shift That Raised Eyebrows: Burden of Proof on the Accused

The most controversial element of the draft was this: if a trader’s activity triggered SEBI’s surveillance systems, it would be up to that individual or entity to prove the legitimacy of the trades. This effectively meant reversing the burden of proof—a major departure from the traditional legal standard where regulators are required to prove wrongdoing.

It wasn’t hard to see why SEBI considered the move. With the rise of high-frequency trading, AI-based execution, and cloud-based communication tools, bad actors now have better means than ever to cover their tracks. SEBI has struggled in recent years to act decisively in cases where circumstantial evidence exists, but hard proof is elusive—especially when data has been wiped or encrypted.

SEBI’s Intent: Catch the Sophisticated, Not the Unsuspecting

The proposed PUSTA rules were clearly designed for a narrow target: those who operate in the grey zones of market behaviour, using layered accounts, digital silence, or rapid order placements to profit without leaving a trail. SEBI's surveillance architecture is among the most advanced globally, yet enforcement has often stalled when the evidence, while suspicious, isn't sufficient to pass legal muster.

PUSTA aimed to fix that. But the regulator quickly ran into a problem of its own: constitutional caution.

Inside SEBI’s Deliberations: Checks, Not Just Chases

SEBI Chairman Tuhin Kanta Pandey and the SEBI Board were not dismissive of the risks that PUSTA aimed to address. But they were equally alert to the legal and ethical minefield the proposal could create. Pandey emphasised that “power must not be misused in a democracy”, cautioning against a structure that could enable overreach—even if well-intentioned.

There were several red flags:

• The reversal of the burden of proof was seen as a potential violation of the principle of natural justice.
• Legal experts flagged concerns over presumption of innocence, a core tenet in Indian and international law.
• There were broader worries that such powers, once granted, could be misapplied, especially against smaller market participants with fewer resources to defend themselves.

In short, the Board recognised the risk of arming the regulator with too much discretion, without building in sufficient safeguards.

Market Response: Relief, But Not Rejection of the Problem

Once word got out that SEBI would not move forward with the draft PUSTA regulations, the response from the industry was swift—and, in many corners, relieved. For legal practitioners, fund managers, and trading platforms, the concern was not just about compliance—it was about the precedent such rules would set.

There was broad agreement that PUSTA addressed a real problem, but the chosen mechanism—forcing individuals to explain their own trades under suspicion—was seen as opening the door to arbitrary enforcement.

That said, most stakeholders weren’t opposed to reform in principle. Their position was clear: if such powers must be introduced, they must come with clear limits, transparent processes, and independent oversight.

Where Things Stand Now: Paused, Not Abandoned

SEBI has since clarified that while the current form of PUSTA has been shelved, the issue itself hasn’t been closed. Technological misconduct remains a priority, and the regulator is expected to return with a more balanced, consultative draft—one that addresses surveillance gaps without compromising civil liberties.

This time around, public consultation will likely play a larger role. Legal experts, market intermediaries, and digital rights advocates are all expected to weigh in if the proposal resurfaces in revised form.

Looking Ahead: What Future Rules Must Get Right

Any future version of PUSTA—or something similar—will need to walk a tightrope. On one side lies the need for sharper surveillance tools in an increasingly tech-savvy market. On the other, the constitutional guardrails that protect due process, privacy, and fairness.

Several guiding principles are now likely to shape the next draft:

• Clear thresholds for initiating regulatory scrutiny under the law.
• Defined timelines and processes for response and redressal.
• Internal and external checks to prevent discretionary misuse of powers.
• And perhaps most crucially, a commitment to transparency—both in intent and in execution.

Final Word: Prudence Over Power

SEBI’s decision to pause the PUSTA rollout is not a sign of weakness—it’s a sign of maturity. In choosing to step back and rethink, the regulator has signalled that safeguarding market integrity doesn’t have to come at the cost of individual rights.

For a market as deep and complex as India’s, that balance may prove just as important as enforcement itself.